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Turkey’s ruling party dips into central bank to fund campaign

An amendment passed on Saturday will force publicly owned companies to pay advance dividends this month – a move that would grant the Justice and Development Party (AKP) government a much-needed influx of cash in the run-up to March 31 local elections.

The amendment will affect any institution whose shares are more than 50 percent publicly owned, a list that includes some of Turkey’s largest banks as well as the national postal service, Turkish Airlines, the state-owned tea giant Çaykur, and others.

It will also affect the Central Bank of Turkey. The Treasury owns the largest stake in the central bank, and it is to the Treasury that it transfers its profits every year, usually after the annual board meeting in April.

The 2019 budget projects the amount the Treasury will gain from public banks and public enterprise at 24.3 billion lira ($4.5 billion). The amount of profit that will be generated by the central bank is still not clear. But given the extraordinary fluctuations in the lira over the past year and the high interest rates in Turkey, one would expect a significant rise over last year’s figures.

Uğur Gürses, an economist and former governor of the central bank, said he expected profits of 35 billion lira. Five billion lira of this would go on corporate tax, and another 20 billion lira would go straight to the Treasury as a dividend.

In short, the amendment aims to provide the Treasury with an injection of cash to the tune of around 50 billion lira ($9.27 billion) by the end of the month, around three months ahead of schedule.

The cash could not be needed more urgently: in truth, the Treasury is at the moment completely bare. Over the last two months several of its borrowing tenders have been cancelled in order to leave cash for the markets and keep interest rates down. Meanwhile, attempts to create an impression that interest rates are falling have backfired and led to higher sales of the lira, forcing the central bank to sell dollar, euro and gold bonds.

The Treasury’s move to foreign currency and gold bonds comes just months after President Recep Tayyip Erdoğan and his son-in-law, Treasury and Finance Minister Berat Albayrak, urged Turkish citizens to convert all their savings to lira, framing this as a national duty to stave off impending crisis as the lira hit record lows.

Yet now it is Albayrak encouraging Turks to put their money in the “safe and guaranteed” investment of Treasury foreign currency bonds.

Despite the government heavily pushing the bonds, no more than 1.1 billion lira ($207 million) were sold between Dec. 17 and Dec. 21. Rather, Turks are putting their money directly in foreign currency accounts, which saw deposits worth 22 billion lira during the same period.

That the public has spurned the 4 percent interest on dollar bonds and 2.5 percent interest on euro bonds is the clearest sign of their mistrust in the government’s promises and economic policies.

Thus, severely lacking in funding sources and with just three months left until the election, Erdoğan’s government has turned to the central bank and other public institutions to find cash for the election economy and to fulfil its vows.

Durmuş Yılmaz, a former governor of the central bank now serving as deputy leader of the nationalist opposition Good Party, believes the move indicates a desperate shortage of cash as well as the short-termism in the government’s economic policies.

In one sense, the aim of this extraordinary appropriation of the central bank – which completely undermines its already shaky reputation – is a direct attempt to use it as its “election coffers” for March 31. At the same time, the repeat sale of dollar and euro bonds between Jan. 7 and Feb. 1 shows the lack of options besides “dollarising” public savings and the economy.

It is likely that in the run-up to the election, the central bank will look to drop interest rates, using the decrease in inflation to 20.3 percent – the lowest since last August – as a justification. This is all very well, except that the decrease was largely driven by the government’s drive to artificially lower inflation by offering a 10 percent discount on the goods used to measure the inflation index.

Faik Öztrak, a deputy chair for the main opposition Republican People’s Party (CHP), believes the public’s lack of interest in government bonds is down to mistrust bred by this type of manipulation. In fact, Öztrak says, the AKP government is simply attempting to shore the economy up until March 31, after which he thinks a deal with the International Monetary Fund is inevitable.

“Turkey is fast returning to the conditions of 1994,” Öztrak said, referring to a previous currency crisis that saw the exchange rate plummet by more than half, inflation rise to triple digits and the central bank lose half its value.

“Now it’s come to their minds to use the central bank to finance the elections, but what they haven’t factored in is the damage this will do to bank’s independence,” he said. “I leave it to the public to decide just how politically independent a bank’s monetary policy can be when its board can be summoned to extraordinary meetings at politicians’ behest.”

He said the central bank’s independence had been similarly eroded by previous governments and the result each time had been higher inflation and a deeper crisis.

Under similar circumstances, past administrations’ attempts to save the day have resulted in triple-digit inflation and the currency losing value to the extent that million-lira banknotes were required.

But the independence, institutional identity and will of the central bank have never been so thoroughly wiped out as they are today, and there has never been an occasion when the government had to take dividends from it or other public banks and institutions in advance.

What we are seeing now shows the government’s frantic attempts to keep the wheels of the economy and the state turning and continue to pay public officials, as well as its willingness to embrace even the most destructive methods to win elections.